- Pound Sterling's buying interest fades amid a cautious market mood.
- The United Kingdom’s economic recovery falters as firms face the burden of higher interest rates.
- The BoE cannot pause the rate-hiking spell as UK inflation heavily diverges from the desired rate.
The Pound Sterling (GBP) struggles to extend recovery and drops sharply amid bleak economic prospects propelled by higher inflation and aggressive monetary policy by the Bank of England (BoE). The GBP/USD pair picks demand as the market mood has turned bullish amid hopes that interest rates by global central banks will peak sooner than expected.
United Kingdom’s preliminary factory activity faltered in July as firms postponed the demand for credit to avoid higher interest obligations. Apart from costly borrowing rates, demand for big-ticket items has slowed as many households are struggling to buy essentials. Meanwhile, housing demand is also facing increasing pressure as individuals are restricting themselves from borrowing money to avoid higher mortgage rates.
Daily Digest Market Movers: Pound Sterling bears strengthen as economic recovery falters
- Pound Sterling drops as the economic outlook has dampened due to higher interest rates by the Bank of England.
- S&P Global reported on Monday that United Kingdom’s factory activity contracted to 45.0 in early July, missing the 46.1 expected and below the 46.5 seen in June, recording a 12th straight contraction in the manufacturing sector. A PMI figure below 50.0 suggests contraction.
- UK’s preliminary Services PMI dropped to 51.5 from the consensus and the prior release of 53.0 and 53.7, respectively.
- July preliminary PMIs were the weakest since January, adding to evidence of the pinch of high inflation and higher interest rates by the Bank of England.
- A sluggish economic outlook has reinforced expectations of a recession in the British economy.
- Uncertainty about UK inflation still persists as resilient consumer spending could offset the recent slowdown in inflation.
- Aggressive BoE’s policy-tightening is building pressure on first-time home buyers. UK homebuilders have cut down on purchasing land and construction activities, Reuters reported.
- To offer support to the middle class that pays high rents, UK Prime Minister Rishi Sunak promised to build one million homes by the next election.
- However, the pressure of higher mortgage rates is likely to stay for longer as the UK central bank is preparing for fresh rate hikes to tame sticky inflation.
- June’s softening price pressures might offer some time to BoE policymakers to reshape the roadmap of bringing inflation down, but a small interest-rate increase in August cannot be ruled out.
- The US Dollar Index (DXY) comes under pressure as investors are certain about an interest rate hike of 25 basis points (bps) by the Federal Reserve (Fed) on July 26 to the 5.25%-5.50% range.
- Investors focus on the interest-rate guidance from Fed Chair Jerome Powell as Fed officials have reiterated the need for one more interest-rate hike in addition to July’s increase.
- Contrary to Fed officials, investors expect that Fed’s 17-month policy tightening cycle will peak on July 26.
- United States preliminary July Manufacturing PMI outperformed expectations but remained below the 50.0 figure that separates contraction. Meanwhile, the Services PMI fell from June’s reading and came in below consensus.
- After the Fed policy meeting, investors will shift their focus toward the second quarter Gross Domestic Product (GDP) data and June’s Durable Goods Orders.
Technical Analysis: Pound Sterling declines to test1.2800
Pound Sterling extends its recovery to near 1.2850 as market sentiment has turned bullish on hopes that the Federal Reserve’s (Fed) interest-rate hike in July will be the last nail in the coffin. The Cable is building a base after declining more than a week below the 20-day Exponential Moving Average (EMA). More broadly, the asset maintains higher highs and higher lows, indicating strength in the upside bias.
BoE FAQs
What does the Bank of England do and how does it impact the Pound?
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
How does the Bank of England’s monetary policy influence Sterling?
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
What is Quantitative Easing (QE) and how does it affect the Pound?
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
What is Quantitative tightening (QT) and how does it affect the Pound Sterling?
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD bounces off lows, retests 1.1370
Following an early drop to the vicinity of 1.1310, EUR/USD now manages to regain pace and retargets the 1.1370-1.1380 band on the back of a tepid knee-jerk in the US Dollar, always amid growing optimism over a potential de-escalation in the US-China trade war.
GBP/USD trades slightly on the defensive in the low-1.3300s
GBP/USD remains under a mild selling pressure just above 1.3300 on Friday, despite firmer-than-expected UK Retail Sales. The pair is weighed down by a renewed buying interest in the Greenback, bolstered by fresh headlines suggesting a softening in the rhetoric surrounding the US-China trade conflict.
Gold remains offered below $3,300
Gold reversed Thursday’s rebound and slipped toward the $3,260 area per troy ounce at the end of the week in response to further improvement in the market sentiment, which was in turn underpinned by hopes of positive developments around the US-China trade crisis.
Ethereum: Accumulation addresses grab 1.11 million ETH as bullish momentum rises
Ethereum saw a 1% decline on Friday as sellers dominated exchange activity in the past 24 hours. Despite the recent selling, increased inflows into accumulation addresses and declining net taker volume show a gradual return of bullish momentum.
Week ahead: US GDP, inflation and jobs in focus amid tariff mess – BoJ meets
Barrage of US data to shed light on US economy as tariff war heats up. GDP, PCE inflation and nonfarm payrolls reports to headline the week. Bank of Japan to hold rates but may downgrade growth outlook. Eurozone and Australian CPI also on the agenda, Canadians go to the polls.
The Best brokers to trade EUR/USD
SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.